July 12, 2007

Creative efficiency or efficient creativity?

The paradox in managing innovation is the difficulty--if not impossibility--of simultaneously having an efficient organization and an innovative one.

Organizations must perform efficiently to survive and thrive in their current environment, but they must also retain the ability to adapt should the environment change. The tension is between adaptation and adaptability, between exploitation of current resources and opportunities and exploration for new ones.

A red herring is a device (literary, academic, or otherwise) that is "laid across the track" to divert or distract people from solving a problem directly. Like this definition.

Our obsession with the tension between the wild and crazy side of innovation and the button-downed nature of ongoing operations is distracting us from one of the more real problems in managing innovation.

A recent article on 3M describes the "struggle between efficiency and creativity" that is represented by their recent CEO succession. James McNerney came to 3M from GE, and brought with him Six Sigma, the efficiency program GE made a standard management practice in the 1990s. McNerney cut costs and improved margins:

The plan appeared to work: McNerney jolted 3M's moribund stock back to life and won accolades for bringing discipline to an organization that had become unwieldy, erratic, and sluggish.

But, as the great tension would suggest, the plan came at a steep price:

At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter.

The author and a host of academics then lay bare the tension:

Those results are not coincidental. Efficiency programs such as Six Sigma are designed to identify problems in work processes—and then use rigorous measurement to reduce variation and eliminate defects. When these types of initiatives become ingrained in a company's culture, as they did at 3M, creativity can easily get squelched.

The tension here is clearly between exploring for what you don't know (the protagonist) and exploiting what you already know (the protagonist). Between color and light, and drab routine.

The terms exploitation and exploration harken back to the oil companies who used to have (and had to have) two separate divisions. One division was responsible for exploiting existing fields, in which productivity was measured in barrels/day and $/barrel, and improvements could be proposed and tested with relative confidence. The skills of exploiting were disciplined management, analysis, and the routinization of work.

But wells inevitably dry up and market demands grow, so oil companies also needed a division that continuously explored for new oil fields. The skills of exploring for oil were independence, risk taking, intuition, and an ability to live out of a suitcase.

This tension was immortalized in the organizational literature by James March, one of the founding fathers of the field, in a brief 1991 article entitled "Exploration and Exploitation in Organizational Learning."

There are profound differences, however, between searching for oil and developing a firm's next new products or strategies. One of the biggest differences is that, when oil is discovered, there is little doubt that it's oil, that the organization is capable of exploiting it, and that it will contribute to the bottom line in some way at some time. This is more akin to discovering a warehouse of widgets just like the ones you're already selling. Regardless of whether you drill 6 wells or 6,000, if one of them is a gusher nobody debates whether this will cannibalize existing markets, not work at all, distract from our current focus resources, etc...

I can't recall a single innovative new product that was obviously and unambiguously valued in it early days by the organization. So there is more to innovation than simply exploring for new ideas.

What is missing is a very significant step that lies between innovation and operations (between exploration and exploitation): execution. At least, that's what I would call it. It's the process of converting an idea, even a prototype, into a set of resources, procedures, metrics, and marching orders that can enable an organization to effectively replicate, scale, and manage the new venture.

I move around in the worlds of design and innovation and have met a lot of wildly creative people. Having good ideas is actually pretty easy for them. I also work with a lot of smart people in operations, and knowing how to ferret out problems, reduce variability, and manage others to task comes pretty easily to them. The challenge is in how these people work together. Good ideas only help the company to the extent they can be routinized--exploiting the exploration.

The big challenge in managing innovation lies, I would suggest, not in building up two very strong skills in innovation and in operations, but rather in building the bridge between them--of developing the people and processes that facilitate the routinization of novelty. Of turning good ideas into practical processes that the larger organization can value, adopt, implement, and manage.

Forget 3M--think about Toyota. They are leaders in manufacturing efficiencies and also at exploring the new frontiers of innovation automobiles. How have they managed the tension? Read any number of books on them (but the original Machine that Changed the World remains the best read) and you find that they are extremely effective at recognizing those ideas that can be routinized and doing so before their competition. Sometimes decades before. Consider the Prius. Ford and GM had many of the same technologies lying around R&D, but having the ideas is not the same as converting them into manufacturing routines, processes, supply chains, and ultimately customers. That's execution.

With the obsession between innovation and efficiency, the skills to execute--and the people who have them--are being largely ignored in modern corporations. And certainly ignored within business schools. Which is a shame.

Comments

Enjoyed the post. You bring up some good points about the tension. For small companies (like mine) innovation is the key to get noticed. However, efficiency is the way to grow the business. Sometimes I lose sight of why I started my company - to take ideas and turn them into products.

I think Google solves this problem by having labs, providing early access to unfinished products and letting the market decide. I read somewhere that they had to cut down on new initiatives to increase the focus.

Incremental innovation is what keeps products improving and competitive.

You are right about the tension. I feel it all the time in my little company.